With a tracker mortgage, the rate of interest is linked to a specified index, usually the Bank of England’s (BoE) base rate of interest. Whenever the base rate changes, so does the tracker’s interest rate and therefore the borrower’s monthly repayment. Tracker mortgages are a type of ‘variable rate’ mortgages.

When interest rates are low, the borrower’s monthly repayment might be less than it would be on a different type of mortgage, such as a fixed-rate or standard variable rate mortgage. But when interest rates are high, the reverse is true. And as the rate is likely to vary, the borrower can never be sure exactly when or whether their monthly repayment may change.

Although the rate of interest on a tracker mortgage is linked to the Bank of England’s base rate, the actual interest rate charged on the mortgage will be determined by the lender and will usually be higher than the base rate due to the inclusion of the ‘margin’. The interest rate can be calculated as the ‘Base rate’ + ‘margin’. If the base rate is 2%, and the margin is 2%, the interest rate on a tracker mortgage will be 4%. If the base rate increases to 2.5%, the rate of interest will be 4.5% (2.5% base rates plus 2% ‘Margin’).

It is important to note that most ‘tracker’ rate mortgages have a minimum rate that will apply to the loan. For example, the mortgage may have a minimum rate of 3% so even if the base rate went below 1% (with a 2% margin) the mortgage rate wouldn’t decrease below 3%. 

Although some tracker mortgages run for the life of the loan, most last for less than that — between one year and 5 years is not untypical. Once the tracker arrangement finishes, most lenders will switch the mortgage to a standard variable rate of interest.